Introduction

On December 20, 2001, Sen. Frank Murkowski, the Ranking Minority Member of the Senate Committee on Energy and Natural Resources requested an analysis of selected portions of Senate Bill 1766 (S. 1766, the Energy Policy Act of 2002) and House Resolution 4 (the Securing America’s Future Energy Act of 2001)¹. In response, the Energy Information Administration (EIA) has prepared a series of analyses showing the impacts of each of the selected provisions of the bills on energy supply, demand, and prices, macroeconomic variables where feasible, import dependence, and emissions. The analysis provided is based on the Annual Energy Outlook 2002² (AEO2002) midterm forecasts of energy supply, demand and prices through 2020.

Because of the rapid delivery requested by Sen. Murkowski, each requested component of the Senate and House bills was analyzed separately, that is, without analyzing the interactions among the various provisions. Because of the approach taken:

• The combined impact of the individual policies cannot be determined by simply adding the individual policy impacts together. For example, a provision establishing a renewable portfolio standard (RPS) for electricity production, and one that establishes a bio-diesel program for transportation fuels, each increases the use of biomass. The simultaneous enactment of the two provisions would be likely to increase biomass costs because of the competition for land and other needed resources. The estimated fossil energy displaced will therefore be lower than the sum of the two individual policy impacts because of the higher resource costs. Stated another way, the impacts of multiple simultaneous policies are non-linear.
• Some policies will interact to increase the overall response while others may interact to mitigate the impacts of each other. For example, when two separate policies increase demand and, consequently, production of an advanced technology, the reductions in manufacturing costs expected from increased production are likely to be accelerated, making the technology even more attractive in later years. The total adoption of the advanced technology in this case could be greater than the sum of the parts.

In addition, the following should also be noted:

• Computation of expected benefits and costs of equipment installed at the end of the forecast horizon (e.g., 2020) requires estimates of costs and prices for a number of years beyond this period. Since EIA does not project costs, prices or benefits past 2020, the estimates of the benefits after 2020 must be assumed for equipment installed by 2020. For example, analyzing consumer product standards for air conditioners through 2020 requires an estimate of the savings through 2036, because of the expected operating life of the new equipment that EIA projects to be installed through 2020. AEO2002, however, only produces projections through 2020. For the remaining years from 2021 to 2036, we have assumed the savings per unit remain constant at 2020 levels. Such estimates of savings are highly uncertain and could be higher or lower than this estimate.
• Some aspects of S.1766 and H.R.4 cannot be modeled because of lack of specificity. For example, several provisions require the Department of Energy (DOE) to evaluate the desirability of setting standards for stand-by power and other electronic devices. Because there is no statement about what the standards will be, EIA cannot quantitatively analyze them.
• Section 403(b) of Executive Order 13123, signed on June 3, 1999, requires Federal agencies to select ENERGY STAR and other energy-efficient products, where cost-effective, when acquiring energy using products. Current ENERGY STAR criteria for central air conditioners and air-source heat pumps specify a minimum efficiency of 12 SEER (seasonal energy efficiency ratio) in cooling mode and 7.6 HSPF (heating seasonal performance factor) in heating mode. The air conditioner and heat pump requirements for Federal agencies specified in Section 124 of H.R. 4 are not expected to provide any additional impact on energy consumption because Federal agencies are already mandated by E. O. 13123 to purchase equipment that meets the requirements set forth in H.R. 4. This analysis will present quantitative results from implementing a 12 SEER standard for all purchases, as a means of comparison with the 13 SEER standard proposed in S.1766.

EIA’s projections are not statements of what will happen but what might happen, given known technologies, current technology and demographic trends, and current laws and regulations. Thus, the AEO2002 provides a policy-neutral Reference Case that can be used to analyze energy policy initiatives, as has been done for each of these studies. EIA does not propose, advocate or speculate on future legislative or regulatory changes. Laws and regulations are assumed to remain as currently enacted or in force in the Reference Case; however, the impacts of emerging regulatory changes, when clearly defined, are reflected.

Models are simplified representations of reality because reality is complex. Projections are highly dependent on the data, methodologies, model structure and assumptions used to develop them. Because many of the events that shape energy markets are random and cannot be anticipated (including severe weather, technological breakthroughs, and geo­political disruptions), energy market projections are subject to uncertainty. Further, future developments in technologies, demographics, and resources cannot be foreseen with any degree of certainty. These uncertainties are addressed through analysis of alternative cases in the AEO2002.

This study addresses the provisions of H.R. 4 and S. 1766 that pertain to efficiency in the residential, commercial, and industrial sectors. The estimated effects of the provisions are presented below where quantitative analysis is feasible. Qualitative discussion is provided for the remaining standards-related provisions analyzed here.

Analysis Summary

Several provisions included in S.1766 and H.R.4 target appliance efficiency in the residential, commercial, and industrial sectors. In particular, S.1766 sets specific standards for residential-sized central air conditioners and heat pumps, torchiere lighting, illuminated exit signs, and low voltage dry-type transformers, while H.R.4 sets specific requirements for Federal purchases of residential-sized central air conditioners and heat pumps. Additionally, S.1766 allows for the Department of Energy (DOE) to enter into voluntary agreements with the goal of reducing industrial sector energy intensity 2.5 percent per year over the next 10 years. Both bills also require the DOE to investigate the applicability of efficiency standards for ceiling fans, furnace fans, commercial refrigerators and freezers, and stand-by power in numerous devices; however, given the lack of specificity in the level and timing of the standards for these four product categories, it is not possible to do an analysis of their effectiveness. A qualitative analysis is presented for illuminated exit signs and transformers, as these technologies are not explicitly represented in AEO2002. EIA does not currently have comprehensive data sources for estimating the quantity and efficiency levels of equipment in use, precluding quantitative analysis of the provisions in S.1766 that address efficiency standards for exit signs and transformers.

Table 1 summarizes the key results from the standards analyzed in S.1766. In order to analyze the proposed air conditioner and heat pump standards, a new baseline energy forecast for the buildings sector was created that uses a 10 SEER standard, rather than the 12 SEER standard that was included in the AEO2002 Reference Case. This is the standard that was proposed by the DOE in the July 25, 2001 Federal Register,and proposed in H.R.4 for Federal purchases. As noted above, the guidelines for Federal purchases of air conditioners and heat pumps proposed in H.R.4 codifies Executive Order 13123, which requires Federal agencies to purchase ENERGY STAR air conditioners and heat pumps, if cost effective. Current ENERGY STAR requirements for air conditioners and heat pumps specify a minimum efficiency of 12 SEER, the same specifications proposed in H.R.4 for Federal facilities. In addition, the discount rate used by Federal facilities in determining cost effectiveness is based on long-term Treasury bond rates, which is consistent with the 10 year or less pay-back period specified in H.R.4. Although the NEMS modeling framework does not differentiate Federal purchases from other purchases, precluding a quantitative assessment of section 124 of H.R.4, the proposed provision mirrors the existing executive order, and the effects of implementation are projected to be negligible. However, as a means of comparison, the analysis below presents the standard proposed in S.1766 (13 SEER) with the standard currently proposed by DOE (12 SEER), assuming a reference case level of 10 SEER. Table 1, therefore, details the energy, carbon emissions, and energy bill savings, relative to a projection of energy demand assuming a 10 SEER standard for air conditioners and heat pumps.

The net present value calculations associated with the standards are the difference between the costs incurred by the consumer by purchasing more expensive equipment through 2020, and the projected annual energy bill savings for the life of the equipment. Since the National Energy Modeling System (NEMS) forecast horizon ends in 2020, the life-cycle savings for the 12 and 13 SEER standards are projected to 2036 by assuming that the 2020 energy bill savings decline linearly until all of the equipment purchased through 2020 has been retired. In Table 1, the projected costs and savings are discounted back to 2002 assuming a 7 percent real discount rate. Although the NEMS modeling framework incorporates an explicit representation of torchiere lighting electricity use, a detailed stock accounting does not exist, and therefore a cost/benefit or net present value calculation cannot be provided. For the torchiere standard proposed in S.1766, the electricity savings relative to the case with a 10 SEER baseline is provided through 2020, the last year of the NEMS projection period.

The results in Table 1 conclude that the standards analyzed here, and required in S.1766 (13 SEER) and proposed by DOE (12 SEER), provide energy and carbon savings over the forecast horizon. Due to the additional costs associated with the more stringent (13 SEER) air conditioner standard in S.1766, the net present value of costs and benefits for the 13 SEER standard yields a negative result, while the standard proposed by DOE (12 SEER) yields a positive net present value.

The sections below present quantitative analyses of the provisions outlined above in more detail and qualitative analyses of the provisions that cannot be captured in NEMS. The analysis of the air conditioning and heat pump standards focuses on the results in the residential sector, since relatively few residential-sized units are in use in the commercial sector, which is dominated by the use of large chillers and boilers.

Notes and Sources